Indian citizens have been anxiously awaiting the Union Budget of 2018-19. Finance Minister Arun Jaitley presented the much anticipated union budget on February 1, 2018.

The Union Budget 2018-19 comes at a time when slowing growth, subdued investment sentiment, and widening fiscal deficit are among the major concerns for the economy. The slowdown in growth has had an impact on job creation as well. In such a scenario, the Budget called for stepping up public investment.

The Budget certainly did not disappoint in relief for farmers, skill development, healthcare, and benefits for seniors. In terms of infrastructure spending too, the government announced some major projects, specifically to develop tourism.

While a few projects, such as flagship National Health Protection Scheme and those on education and infrastructure development can be considered revolutionary, the success lies in the implementation.

At the same time, major expenses needs to be supported by sound steps to generate a higher revenue. Hence, as many feared, the government introduced a 10% tax on Long Term Capital Gains arising out of sale of equity shares and equity mutual fund units, on which Securities Transaction Tax (STT) is paid.

As per the finance minister, “The total amount of exempted capital gains from listed shares and units is around Rs 3,67,000 crores as per returns filed for A.Y.17-18. Major part of this gain has accrued to corporates and LLPs.” He further mentioned that this new tax regime will lead to “a revenue gain of about Rs20,000 crores in the first year. The revenues in subsequent years may be more.”

Dividends from equity mutual funds were earlier tax-free, they will now attract a dividend distribution tax (DDT) of 10%. This will be a major blow for retail investors who invested in the dividend plan of mutual funds in the view of generating regular income.

The budget also increased the cess on personal income tax. At present, there is a 3% cess on personal income tax and corporation tax consisting of 2% cess for primary education and one per cent cess for secondary and higher education. In order to fund the needs of education and health of BPL and rural families, the existing 3% education cess will be replaced by a 4% “Health and Education Cess” to be levied on the tax payable.

“This will enable us to collect an estimated additional amount of Rs11,000 crores,” said the finance minister in his budget speech.

The personal income tax slabs rates and surcharge remains unchanged.

The finance minister also announced that a comprehensive Gold Policy will be formulated to develop gold as an asset class. The Government will also establish a system of consumer friendly and trade efficient system of regulated gold exchanges in the country. Gold Monetization Scheme will be revamped to enable people to open a hassle-free Gold Deposit Account.

Let’s take a look at the key budget highlights and the impact it will have on your personal finance.

Tax on LTCG on equity shares and equity mutual fund units

Under the existing regime, long term capital gains arising from transfer of long term capital assets, being equity shares of a company or an unit of equity oriented fund or an unit of business trusts , is exempt from income-tax under clause (38) of section 10 of the Act. However, transactions in such long-term capital assets carried out on a recognized stock exchange are liable to securities transaction tax (STT).

The government will now withdraw the exemption under clause(38) of section 10. It has now introduced a new section 112A in the Income Tax Act, to provide that long term capital gains arising from transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, shall be taxed at 10% of such capital gains exceeding one lakh rupees. There will be no indexation benefit.

All gains up to January 31, 2018 will be "grandfathered." As per the example given by the finance minister, if an equity share is purchased six months before January 31, 2018 at Rs100 and the highest price quoted on January 31, 2018 in respect of this share is Rs120, there will be no tax on the gain of Rs20 if this share is sold after one year from the date of purchase. However, any gain in excess of Rs20 earned after January 31, 2018 will be taxed at 10% if this share is sold after July 31, 2018.

The gains from equity share held up to one year will remain short-term capital gain and will continue to be taxed at the rate of 15%.

Tax on dividends of equity mutual funds

Currently, in respect of any income distributed by way of dividends to a unit holder of equity-oriented mutual funds is not chargeable to tax under section 115R. Under the new budget, any income is distributed by a Mutual Fund being, an equity oriented fund, the mutual fund shall be liable to pay additional income tax at the rate of 10% on income so distributed. This is done in order to provide a level playing field between growth oriented funds and dividend paying funds, with the implementation of the capital gains tax regime for equity oriented funds.

Standard deduction of Rs 40,000 for salaried income

Section 16 provides for certain deduction in computing income chargeable under the head "Salaries". From AY2019-20 onwards, the Income Tax Act will allow a standard deduction up to Rs 40,000 or the amount of salary received, whichever is less.

Consequently, the present exemption in respect of Transport Allowance (except in case of differently abled persons) and reimbursement of medical expenses will be withdrawn. Other medical reimbursement benefits in case of hospitalization etc., for all employees shall continue.

“Apart from reducing paper work and compliance, this will help middle class employees even more in terms of reduction in their tax liability. This decision to allow standard deduction shall significantly benefit the pensioners also, who normally do not enjoy any allowance on account of transport and medical expenses,” the finance minister stated in his budget speech.

Health and Education Cess on personal income tax

“Education Cess on income-tax” and “Secondary and Higher Education Cess on income-tax” shall be discontinued. However, a new cess, by the name of “Health and Education Cess” shall be levied at the rate of 4% of income tax including surcharge wherever applicable, in the cases of persons not resident in India including company other than a domestic company.

NPS tax benefits extended to all subscribers

Under the existing provisions of the clause (12A) of section 10 of the Act, an employee contributing to the NPS is allowed an exemption in respect of 40% of the total amount payable to him on closure of his account or on his opting out. This exemption is not available to non-employee subscribers. In order to provide a level playing field, clause (12A) of section 10 of the Act will be amended to extend the said benefit to all subscribers.

Proportionate deduction for single premium health insurance policy

The Finance Bill 2018 provides that in a case where premium for health insurance for multiple years has been paid in one year, the deduction shall be allowed proportionately over the years for which the benefit of health insurance is available, subject to the specified monetary limit.

Exemption of TDS for senior citizens

Exemption of interest income on deposits with banks and post offices to be increased from Rs10,000 to Rs50,000 and TDS shall not be required to be deducted on such income, under section 194A. This benefit shall be available also for interest from all fixed deposits schemes and recurring deposit schemes.

Deduction on interest income increased for senior citizen

At present, a deduction upto Rs 10,000 is allowed under section 80TTA to an assessee in respect of interest income from savings account. A new section 80TTB will now be inserted, so as to allow a deduction upto Rs 50,000 in respect of interest income from all deposits held by senior citizens. However, no deduction under section 80TTA shall be allowed for senior citizens in these cases.

Limit on health insurance increased for Senior citizens

Section 80D provides that a deduction upto Rs 30,000 shall be allowed to an assessee, being an individual or a Hindu undivided family, in respect of payments towards annual premium on health insurance policy, or preventive health check-up, of a senior citizen, or medical expenditure in respect of very senior citizen. The Finance Bill will now amend section 80D so as to raise this monetary limit of deduction from Rs 30,000 to Rs 50,000.

All senior citizens will now be able to claim benefit of deduction up to Rs 50,000 per annum in respect of any health insurance premium and/or any general medical expenditure incurred.

Section 80DDB of the Income Tax Act, provides that a deduction is available to an individual and Hindu undivided family with regard to amount paid for medical treatment of specified diseases in respect of very senior citizen upto Rs 80,000 and in case of senior citizens upto Rs 60,000 subject to specified conditions.

The budget has now raised the limit of deduction for medical expenditure in respect of certain critical illness from, Rs 60,000 in case of senior citizens and from Rs 80,000 in case of very senior citizens, to Rs 1 lakh in respect of all senior citizens, under section 80DDB.

Rationalization of the provisions of section 54EC

Section 54EC of the Act provides that capital gain, arising from the transfer of a long-term capital asset, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, shall not be charged to tax subject to certain conditions specified in the said section.

The section also provides that “long-term specified asset” for making any investment under the section means any bond, redeemable after three years and issued by the National Highways Authority of India or by the Rural Electrification Corporation Limited; or any other bond notified by the Central Government in this behalf.

The Finance Bill 2018, attempts to rationalise the existing provision relating to investment in capital gain bonds by providing that the exemption shall be available only in respect of long-term capital gains arising out of sale of immoveable property and investment in the bond shall be for a minimum period of 5 year from the existing 3 years.

Section 54EC will now be amended so as to provide that capital gain arising from the transfer of a long-term capital asset, being land or building or both, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, the capital gain shall not be charged to tax subject to certain conditions specified under the section.

Incentives for new employees

The finance minister announced that the Government will contribute 12% of the wages of the new employees in the Employees Provident Fund EPF for all the sectors for next three years. Also, the facility of fixed term employment will be extended to all sectors.

Incentive to encourage employment of women

To incentivize employment of more women in the formal sector and to enable higher take-home wages, the finance minister proposed to make amendments in the Employees Provident Fund and Miscellaneous Provisions Act, 1952 to reduce women employees' contribution to 8% for first three years of their employment against existing rate of 12% or 10% with no change in employers' contribution.

The budget 2018 will definitely bring a cheer and relief to senior citizens and the marginalized income group.

However, investors in equity shares and equity mutual funds will be a disappointed lot. Especially, mutual fund investors who have invested in the dividend plan of equity-oriented funds such as balanced funds in order to earn regular income.

It is now time to review your mutual fund portfolio and a make changes and switch plans keeping in mind your financial goals and tax implications. If you are under not sure how to structure your portfolio, do not hesitate to take help of an investment adviser.

Editor's note:

When planning your financial goals with mutual fund schemes, be realistic. The buying and selling of mutual fund schemes should be carefully tuned to your risk profile, investment objectives and financial goals. In financial planning, setting the right asset allocation and regularly rebalancing your portfolio are key areas that ensure your financial wellbeing.

This is why we strongly suggest that you avail of PersonalFN’s Mutual Fund Portfolio Review service. PersonalFN’s ethical and unbiased investment advisers will comprehensively review your mutual fund portfolio. Here you will get Buy / Sell / Hold recommendations on your existing portfolio, keeping in mind the five action points discussed in this article. The portfolio will be revamped based on your requirement and risk profile. We highly recommend that you opt in for it.

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